What Percentage of Your Income Should Go to Rent?
The 30% rule is a popular guideline for paying rent
When renting your first apartment—or considering your next one—an important question to consider is what percentage of income should go to rent. Spending too much of your paycheck on monthly rental payments could mean you come up short when it comes to covering other expenses, paying off debt, or advancing your financial goals.
The 30% rule is a popular guideline for determining what percentage of income should go to rent. As you plan your rental budget, here are the most important things to keep in mind.
The 30% Rule Explained: How Much Should You Pay for Rent?
In simple terms, the 30% rule recommends that your monthly housing costs not go above 30% of your gross monthly income. So, if you gross $5,000 per month, the max you should be paying for housing costs, including rent, is $1,500.
The 30% rule is commonly accepted in personal finance circles. It is also a guideline many landlords follow when determining if an individual can afford the rent. The 30% rule derives from income guidelines set in the 1960s for public housing, so needless to say, it's a bit outdated.
Interestingly, the 30% rule applies to rent, but there's a different number that's used for mortgage payments. In mortgage lending, lenders typically look for borrowers whose combined monthly housing and debt payments don't exceed 43% of their income. So, using the same $5,000 monthly income as an example, this rule assumes you'd spend $2,150 per month combined for housing and debt repayment.
Why the Rule Doesn't Always Work
There are two big flaws associated with the 30% rule when deciding what percentage of income to spend on rent. First, it doesn't account for inflation and rising rental prices.
The national median rent price declined slightly in 2018 but is on the rise again. Rent prices are climbing more rapidly in some areas than others, like Las Vegas and its surrounding suburbs.
Wage growth, meanwhile, has been relatively flat since 2007, so while rental rates are climbing, incomes aren't necessarily keeping pace.
The other issue with the 30% rule is that it's not personalized to your situation. It doesn't take into account, for example, how much student loan or credit card debt you might be paying off. Nor does it consider how much money you're earning, your financial goals, or the condition of the real estate market where you are planning to rent.
The average monthly student loan payment is $393. The median salary for a new college grad is $50,944. At current federal income tax brackets, this shakes out to $43,878, or about $3,656 month (this does not include state taxes or other deductions). Using the 30% rule, you'd need to allocate about $1,097 a month for rent. Subtract $393 for student loan payments, and you're left with $2,166 per month. That may seem like a lot, but when you factor in taxes, transportation, health care, insurance, food, clothing, and utilities, it can disappear quickly.
On the flip side, you may be a high-income earner making $250,000 a year. In that scenario, after accounting for federal income taxes, the 30% would dictate spending about $56,000 a year, or $4,682 a month on rent. You could certainly do that, but if you're trying to sock as much money as you can in savings so you can, say, retire early, you may want to spend much less on rent.
What Percentage of Income Should You Spend on Rent?
The best answer to this question may be whatever works best for your budget and financial situation.
If you don't have any debt, then you may be able to afford to spend more than 30% of your income rent. Or it could be a necessity if you live in a housing market where rent prices are skyrocketing.
On the other hand, you may be angling to spend the lowest possible amount on rent each month so you can pay off debt or grow your savings. Carefully planning out your budget can help.
Take stock of your monthly expenses and discretionary spending. A budgeting app can help you keep tabs on your expenses. Then, add up all of your income sources and deduct your expenses from that total.
This budgeting can give you an idea of how much you have going out each month, versus coming in. And it can tell you if you can afford to pay more for rent or if you should be looking for lower rent payment.
Final Takeaway: Be Proactive to Minimize Rent Costs
If it's looking like your rent might be significantly more than 30% of your income, there are a few things you can do to curb some of the pressure on your budget. These tips may help you save money on rent and preserve more of your income each month:
- Consider getting one or more roommates to share the cost of the rent. (And as a bonus, you can also save money by splitting things like utilities and food costs.)
- Ask your landlord if they might consider offering a discount on monthly rent if you're able to offer a larger security deposit or sign a longer lease. Some landlords may agree to shave a few dollars off rent if they can count on you for stable rental income.
- Alternately, talk to your landlord about bartering services for a discount on rent. For example, they may cut you a break for helping out with landscaping or repairs on the property.
- Choose a location that's close to public transportation or is highly walkable, so you spend less on gas to get around. Or, consider getting rid of your car altogether if possible.
- If all else fails, cut out the extras. When you can't lower your rent costs any more than you already have, look at what else you can get rid of, like cable TV or premium internet services to save on monthly expenses.
United States Census. "Who Can Afford to Live in a Home?" Accessed Oct. 9, 2019.
Consumer Financial Protection Bureau. "What Is a Debt to Income Ratio? Why Is the 43% Debt-to-Income Ratio Important," Accessed Oct. 9, 2019.
Zillow. "U.S. Rent Growth Accelerates as Home Values Stabilize (June 2019 Market Report)," Accessed Oct. 9, 2019.
Board of Governors of the Federal Reserve System. "2017 Economic Well-Being of U.S. Households in 2016 - May 2017: Education Debt and Student Loans," Accessed Oct. 9, 2019.
NACE Center. "Salary Survey: Final Starting Salaries for Class of 2018 New College Graduates Executive Summary," Accessed Oct. 9, 2019.